Report: An Analysis of Bitcoin's Use in Illicit Finance

As Bitcoin and other cryptocurrencies rise to record levels ahead of the direct offering of crypto exchange Coinbase, former Acting CIA Director Michael Morell is pushing back against conventional wisdom that says Bitcoin is ripe for illicit activity. 

In a report sponsored by the Crypto Council for Innovation (a lobbying group created by Coinbase, Fidelity Square and Digital Assets), Morell argues that Bitcoin isn’t any more exposed to illicit use than other forms of currency.

The Cipher Brief talked with Morell about his findings and how they intersect with national security.  

The Cipher Brief is publishing the full report, with permission.  For insights on why Morell undertook this sponsored study, and how it relates to US national security, read My Experience with Bitcoin and Challenging Conventional Wisdom, exclusively in The Cipher Brief.

An Analysis of Bitcoin's Use in Illicit Finance

by Michael Morell with Josh Kirshner and Thomas Schoenberger

Preface 

New technologies almost always come with both significant benefits for society as well as negative externalities. It is the role of government officials to make policy that allows the benefits to flourish while protecting us from the downsides. As I saw firsthand in my 33-year career at the Central Intelligence Agency, the process our government uses to get this balance right can often be frustratingly slow, but it has ultimately and typically met the challenge.

One example is how our government has adjusted to technological advances in financial and payment networks while simultaneously safeguarding vital systems.  Online banking was introduced in 1994, but it was not until 1999, with passage of the Uniform Electronic Transfers Act (followed by passage of the federal E-SIGN Act in 2000), that standards were put in place to establish the legality of electronic documents and signatures.  Adoption of online banking grew substantially as these laws were enacted and as a regulatory framework took shape to match what were then considered revolutionary technological advancements.

Today, the rapid adoption of blockchain technologies, and the cryptocurrencies they support, are on their way to revolutionizing global financial and payment systems.  And, as expected, we are beginning to see a balancing between innovators and regulators, with prominent voices weighing in— some touting cryptocurrency as the future of finance and others raising concerns about the illicit finance implications of the cryptocurrency ecosystem.

Having devoted my career to protecting and advancing the national security interests of the United States, I recognize the importance of ensuring that technological advancements related to critical industries are accompanied by smart, informed, and timely adjustments to regulatory frameworks, policies, and laws. Those who safeguard our nation simply must have the right tools to do their jobs. Period.

It is against this backdrop that I, and two of my colleagues from Beacon Global Strategies, conducted an analysis regarding the degree of illicit activity associated with cryptocurrencies in general and Bitcoin in particular.  The project was sponsored by a group of leading cryptocurrency innovators and investors.  The terms of the engagement were that I would “call it as I see it,” with objectivity and transparency, just as I had done throughout my career as an intelligence analyst. I am hopeful that this analysis will help advance a healthy and fact-based dialogue as policymakers determine how to best ensure that these financial innovations serve the national interest.

Introduction

So far, 2021 has been a year of significant developments and milestones for Bitcoin.  Its price surpassed $60,000 for the first time in its history. Major corporations, from Tesla to Square to MicroStrategy, are adding it to their balance sheets. Large banks are providing Bitcoin related services, with Morgan Stanley saying it will soon offer access to three Bitcoin funds for its wealth management clients. Canada has approved Bitcoin exchange traded funds (ETFs). There is growing momentum for Bitcoin’s emerging use as a store of value.

Yet there is a common belief that the Bitcoin market is rife with illicit activity, with many holding this belief pointing to several high-profile incidents. When the illicit Silk Road darknet market (DNM) was shut down in 2013, more than 26,000 Bitcoin were seized by the FBI. AlphaBay, formed in 2014 and widely viewed as an heir to Silk Road, was shuttered by international authorities in 2017 after building a customer base of over 400,000, with transactions conducted largely in Bitcoin. The 2017 WannaCry ransomware attack that infected more than 200,000 computers worldwide required payment in Bitcoin. Bitcoin was even used to help fund some of those involved in the insurrection at Capitol Hill on January 6.

The conventional wisdom on this issue has been reinforced by public statements from senior government officials on both sides of the Atlantic who have suggested that Bitcoin is used primarily for illicit activities.  Eye-catching media reports, like a recent Buzzfeed article titled, “Secret Documents Show How Terrorist Supporters Use Bitcoin – And How the Government is Scrambling to Stop Them,” seem to add weight to such remarks.

In undertaking our analysis, we consulted a diverse group of experts in the fields of cryptocurrency technology and investment, financial services, payment systems, global intelligence and security, financial regulation, and law enforcement. We interviewed executives from major blockchain analytics firms, former senior Treasury Department officials, a senior official from the Commodity Futures Trading Commission (CFTC), and a former CIA intelligence analyst, as well as academics, venture capital investors, former federal prosecutors, and a former leader in the banking industry. We also consulted studies from the U.S. Department of Justice; the Financial Crimes Enforcement Network (FinCEN); the Financial Action Task Force (FATF); major blockchain analytics firms; the Brookings Institution; RAND Corporation; BAE Systems; and the Foundation for the Defense of Democracies.